The bond ladder can be used in multiple ways, such as to provide cash flow for a short period of time (like filling in for Social Security until the benefit starts) or to provide income for essential expenses for a longer period (for example, 20 years).
The ladder configurations that the advisor wants to analyze are set up in the Bond Ladders tab. Each configuration is given a unique name so that the advisor can choose the ladder by name while building the income plans. One way to define the ladder is by choosing the number of years for which the income should be generated from the ladder and choosing the share of the retirement income that the ladder will generate.
Another method to configure the ladder is relative to a deferred Social Security benefit. In this method, the ladder is configured to provide a fill-in cash flow that matches the deferral period and amount of the Social Security benefit. Specifically, the bond ladder provides cash flow until the larger amount of the benefit between both spouses starts.
Multiple configurations can be set-up in the tab to ease the process of creating and comparing multiple strategies quickly. By specifying an income strategy during the creation of the plan, the advisor chooses an option for the ladder among the pre-defined ones. All available ladder configurations can be submitted during the optimization run. Further information regarding optimization functionality will be described in another article.
Quote Provider & Trade Execution
The bond ladder is constructed using the bond inventory, reference and market data provided by firms that offer execution services for such portfolios. Currently, only Treasury Inflation Protected Securities (TIPS) based inventory is supplied to the software for bond ladder construction. Accuracy of the ladder composition and cash flow from the ladder depend on the integrity of data provided by these firms.
The Income Discovery application doesn’t play a role in the execution of the ladder. The advisor can execute the trades for the bonds using his/her choice of execution and clearing firm.